Monday, February 20, 2017

Why Such Restrictive Mortgage Lending?

The Mortgage Corner

Earlier this month, researchers at the Urban Institute’s Housing Finance
Policy Center published some of their research on lending standards. Drawing on
data from the Home Mortgage Disclosure Act, they found that lower-credit
applicants accounted for only 33 percent of all applicants in 2015. That
compares to 62 percent in 2006, at the height of the bubble, and 50 percent in
2000, when market conditions were generally considered balanced.

What determines a “lower-credit applicant’, according to the Urban Institute?
A FICO score below 700, a loan-to-value ratio less than 78 percent, and debt to
income ratio less than 30 percent. That means prospective homeowners and
borrowers are either easily discouraged, or other factors that tighter credit
criteria are at play, since 700 is still a good credit score and even a 10
percent down payment with 45 to 50 percent debt to income ratios usually mean a
credit-worthy borrower in today’s housing markets.

Of course it makes sense that borrowers with “less than perfect credit” would
have a more difficult time qualifying for a mortgage. But why 7 years into this
recovery would so many lower credit applicants still have problems qualifying?

There are a number of factors, including higher home prices, of course. And
incomes are not rising as they should even with this low inflation environment,
while mortgage rates remain historically low—still below 4 percent for
conforming 30-year fixed rates—an incredible boon for prospective homebuyers
given the low inflation environment..

In fact, it’s not so much that lending standards are stricter. Rather, thanks
to the government ownership of conventional mortgage giants Fannie Mae and
Freddie Mac, mortgages have become more expensive because of so-called fee
addon’s with “less than perfect” credit scores below 700, which Fannie Mae and
Freddie Mac have tacked on more recently.

Why discourage what are very credit-worthy borrowers in normal times? Costs
go up exponentially with credit scores below 720 for Fannie Mae and Freddie Mac
guaranteed mortgages—as much as 2.5 points, which translates to an equivalent
0.625 percent rate increase.

It seems that the US Treasury has been trying to discourage all but the most
credit-worthy borrowers, all in the name of down-sizing the GSEs. In fact the
Obama Treasury Department has made no secret of wanting to close down Fannie and
Freddie, which is why it has been taking all of its profits since a 2012
modification to Treasury’s conservation agreement, rather than allowing them to
build up their capital base.

Yet delinquency rates are almost back to historical levels. Fannie Mae reported
that the Single-Family Serious Delinquency rate barely increased to 1.23 percent
in November, up from 1.21 percent in October. Big Deal! The serious delinquency
rate is down from 1.58 percent in November 2015. But that is close to the long
term delinquency rate that is just under 1 percent. The definition of serious
delinquency is mortgage loans that are "three monthly payments or more past due
or in foreclosure".

The Urban Institute’s Laurie Goodman, co-director of the Housing Finance
Policy Center, sees the decline in lower-credit applicants as clearly
problematic, and symptomatic of an overly-tight mortgage market, although it’s
not clear whether would-be applicants are holding back because they are aware
they may not qualify, or for some other reason, such as not having enough money
for a down payment or losing interest in homeownership.

Earlier Urban analysis suggested that tight lending meant that 1.1 million
mortgages that would have been made in 2001 were “killed” – never written – in
2015. The real answer to this problem of what is really a defacto denial of
credit to lower income homebuyers is to pry Fannie Mae and Freddie Mac from the
greedy grasp of Treasury and return them to the private marketplace.

There are many forms that could take, but it means Congress and the Trump
Administration has to show some initiative.

No comments:

Harlan Russell Green, Editor/Publisher

Harlan Green is a Mortgage Broker in Santa Barbara, California since the 1980s and economist. As Editor/Publisher of PopularEconomics.com, he has published 3 weekly columns-- Popular Economics Weekly, Financial FAQs, and The Mortgage Corner-since 2000, and is a featured business columnist for Huffington Post. Please refer to the populareconomics.com website for further information.